Yes, it is better to buy a used car than a new car. You save on depreciation, taxes and insurance. Most people do not realize that, although a vehicle is necessary, it is also the worst investment possible as it depreciates 20 to 30 percent in value the moment a new car is driven off the dealers lot. Take advantage of someone else by buying a slightly used car (1-3 years old with 10,000 to 30,000 miles). Let someone else pay that ridiculous depreciation. Besides with all the recent improvements in cars of all makes and models it is not uncommon for a car to run to 200,000 miles.
It used to be that back in the 80s a import would run 100,000 to 150,000 miles and a domestic like Ford or GM was good until 80,000 to 100,000 miles and then it was time to junk it. With recent improvements it is not uncommon for a car to reach 150,000 miles plus of any make. When you equip this with the fact that most states have a rather high sales tax, property tax or combination thereof that is directly related to the value of the car, a used car with a lower value becomes a more attractive option. Even insurance is lower on used cars. So with all the savings in buying used versus new, should you pay the asking price at your local used car dealer?
Absolutely not. Having experience as one of the top car salesman in the entire country, I can definitely explain how a used car dealership makes money and exactly how much they will profit off of a sale. The basic rule of thumb is that for every $10,000 in price there is at least $2,000 in markup or profit. So, in a $20,000 car the asking price includes around $4,000 in dealer markup (profit). On top of that there is a dealer processing fee that almost every dealer charges (average of $300 to $600 per car). The so called dealer processing fee is just pure gravy or profit to the dealer. The processing fee came about as a way to generate non commissionable profit (profit that the dealer did not pay a percentage of to the salesman). Basically, the dealer processing fee has nothing to do with any processing and is a scam (do not pay it and if they refuse to remove it go elsewhere. If enough people do this they will remove the bogus fee).
Now, there can be costs that the dealer has in detailing, servicing, etc to the car. These are usually minimal and always ask for documentation for anything they say. For instance, if the dealer says we had a whole new brake system put into that car and it cost over $2,000. That may be true, but it probably is not. The actual service records will probably show $300 or so. If they will not show you the actual service records leave and look for another dealer. This means they are hiding something.
So, now you know how they markup their cars, but first you must understand that there are some very honest and reputable dealers, but there are 10 times that many that are extremely dishonest. Here are some definite rules that you must follow.
1) Drive the vehicle. Do not take their word for anything. Drive it. Take it for the day and drive it on the highway, curvy roads and in stop and go traffic. Use it like you normally would. This will reveal problems or items that need to be looked into or fixed.
2) Always, after you have settled on a car that meets your needs, take it to an independent mechanic. This is not as important on low mileage 1-3 year old cars, but vitally important on older cars with higher mileage. The independent mechanic or shop will give you a complete run down for about $60 that will reveal everything about the car and whether or not it is a good deal or a nightmare waiting to happen.
3) Run a Carfax report. This can reveal previous accident and or flood damage, but it does not over rule the independent mechanic. Sometimes a mechanic will find things a Carfax did not report like a flood or car accident. Not all accidents and flood damage are correctly reported.
4) Always negotiate the purchase price. Never let them switch you to payments until you have agreed to a price. It amazes me how many people are easily switched to payments where they have no idea what the purchase price and profit or markup are. Most do not even know the term or rate before they commit. They just want you to commit and then the finance manager befriends you and takes even more money out of your pocket. At most dealerships the front end profit averages around $1500 on a used car and the back end or finance office profit averages around $1700. This money comes from one source the consumer.
5) Negotiate. Do your homework. Be ready to walk and look elsewhere if the dealer will not be reasonable. Look into separate financing. What most people do not realize is that a home equity loan could save you huge on rate and interest. A car dealer as a rule adds 2 to 3% to the actual rate for profit and they call it their convenience for providing a service (as I saw on a CarMax sign and do not think Carmax will save you money with their no haggle price. A simple comparison will prove this). In California they have created laws and legislation to curb this practice or limit it. Always ask the finance manager for the approval rate and proof. The banks will each fax over an approval. If the rate is too high then walk.
6) An even better alternative is to buy your car online. I recently bought a GMC envoy through eBay and got a better price than I could have at a dealer only auction. I paid about $3500 less than what the dealers actual cost would be on this vehicle. I also did not pay any bogus processing fee. When I drove by some local dealers and showed them the car and told them what I paid they said it was impossible until I showed them the bill of sale, title and paperwork. Now several of these dealers are buying their own cars online and through Ebay. It is important to note that you must do your research online and delve deeply into the car, the sellers feedback and transaction history, email questions that you have, and look into price and listing histories for the make, year and model of car or truck you are interested in. Watch out for processing fees and such (they are all listed clearly). The best thing about buying online is you control the price, no back end profit for the dealer, and you save big!
How big can you save online? I saved over $9,000 off of what local dealers were asking for the same envoy and mine had even more options. The best deal on a used car is to avoid the dealer completely and buy it online. You can find your own financing regardless if you have good or bad credit and save a ton. If you must go to a dealer, never fall in love with any car. The dealer will use this to their advantage. Use the steps above and give them a fair offer. You want to end up at $500 over their cost and that is reasonable. I have seen profits of upwards of $13,500 or more on one vehicle worth $30,000. That is sickening. The average dealer profit is $2,500 to 3,000 per used car. Do not get taken by a used car dealer. Do your homework and compare. Not only will you save just from buying a used car, but you will save for years on things like term, rate, interest, taxes, etc. The average American works too hard to fork over one or two months earning to the dealer for profit.